Sirius XM has filed an antitrust suit against SoundExchange and the American Association of Independent Music, alleging that these entities have been colluding with the major and certain independent record labels to prevent Sirius XM from direct licensing the sound recording copyrights it needs to provide its various services.

For those unfamiliar with the arcane world of compulsory licensing for sound recording performance rights, the Copyright Act contains various compulsory licenses that allow certain kinds of digital music services to publicly perform sound recordings, and make ephemeral copies for the purpose of operating such services. SoundExchange used to be a division of the RIAA, but is now technically (but not really functionally) an independent corporation that collects royalty payments for these compulsory licenses, and distributes the royalties to the record labels that own the copyrights and the recording artists featured on the recordings. SoundExchange operates under a limited antitrust exemption, which allows it to negotiate rates collectively on behalf of its member record labels and to litigate rate proceedings before the Copyright Royalty Board when such negotiations do not yield a rate agreement. Having endured several of these “negotiations’ and rate proceedings against SoundExchange, I could write a book about the inequities and problems inherent in that system. But I digress.

Sirius XM is, of course, a company that provides satellite radio and other types of digital music services that use various of the compulsory licenses discussed above. Notably, nothing in the Copyright Act requires a digital music service to avail itself of the compulsory licenses if they are willing and able to obtain direct licenses from the owners of the sound recordings it wishes to play on its service. Rather the compulsory licenses were meant to 1) ensure that record labels, well known for making stupid business decisions based on spite and a desire for total control, could not refuse to license non-interactive digital music services and 2) allow music services to avoid the hassle of obtaining separate licenses from all of the thousands of record labels.

In 2010, Sirius XM began a program of seeking direct licenses from record labels. This made sense for various business reasons explained in the complaint. There are also reasons why an independent record label might want to grant a direct license, even if the license is at a lower rate than the compulsory license rate set by the Copyright Royalty Board. For example, SoundExchange deducts its administrative costs, including massive litigation costs for CRB rate proceedings, from the royalty pool before distributing the remainder to record labels and artists. No such costs would be deducted from the direct license royalty stream. Also, SoundExchange is not exactly known for making prompt or transparent payments to copyright owners.

According to the complaint, SoundExchange, RIAA and other trade organizations apparently viewed this as a direct attack on their ability to apply monopoly power in rate negotiations and promptly began colluding with the major record labels to apply pressure on independent record labels and discourage them from entering into direct license deals with Sirius XM. The various detailed allegations of anti-competitive conduct by SoundExchange and the major record labels are fascinating if you are at all interested in the music business or compulsory licensing.

In addition to various injunctive and monetary relief, Sirius XM is asking the Court to “order SoundExchange to be dissolved and unwound on an orderly basis or, alternatively, order that an independent monitor be appointed to oversee SoundExchange’s compliance with the antitrust laws, at SoundExchange’s expense, for a period of ten years or other amount of time to be determined by the Court.”

Paul Fakler

I am an intellectual property lawyer, and a partner at Arent Fox LLP. I am the Immediate Past Chair of the New York State Bar Association Intellectual Property Law Section. One of the primary focuses of my practice is copyright litigation and counseling. This is my personal copyright law blog, and the views I express here are my own (not those of Arent Fox or the New York State Bar Association). The content of this blog is not legal advice, nor is it an advertisement for my legal services. Read More…